ECO 215 Ch 6
Sunk costs
costs that have already been incurred and cannot be recovered and should not affect current and future production decisions (Ch 6)
free entry
the ability of a firm to enter an industry without encountering legal or technical barriers
free exit
the ability of a firm to exit an industry without encountering legal or technical barriers
production function
the relationship between quantity of inputs used and the quantity of output produced (Ch 6)
Salmon fishing in Alaska is a seasonal business; May through September is the best time to bait salmon and halibut. Toland Fisheries, a small commercial fishery, recorded its highest ever catch last year. They started this year's fishing season with the same number of workers and equipment. With the new season also starting well, Toland has increased hiring substantially. However, the fishery did not make any additional investment in trawlers and other fishing equipment. Other things remaining unchanged, what is likely to happen to the marginal product of each new worker in the short run?
It will be increasing at a decreasing rate, meaning each additional worker will have a lower marginal product of labor than the previous one hired.
How would the introduction of legal/technical barriers to entry affect the long-run EQ in a perfectly competitive market?
It would reduce any downward pressure on prices from entry and allow economic profits in the long run (Ch 6)
You are planning to build an apartment building. Your market research department estimates that your revenues will be $800,000. Your engineering department estimates the cost will be $550,000. You started construction and spent $150,000 to build the foundation when the recession begins. This causes the market research department to revise its revenue estimates downward to $399,950. Should you complete the apartment building?
No, the remaining cost to build is $400,000 and you only expect to earn $399,950; you will ignore the $150,000 spent since it is a sunk cost. (Ch 6)
In a perfectly competitive market, all of the following are true except
The market supply cannot affect the retail price (Ch 6)
What is the difference between the industry demand curve for a TYPICAL GOOD and one for an INDIVIDUAL firm in the market? (assume perfect competition)
The realistic assumption that the Law od Demand holds for the good under consideration (Ch 6)
Is it possible for accounting profit to be positive and economic profit to be negative?
Yes, this could occur if explicit costs were modest & implicit costs were high
Shutdown
a short-run decision not to produce anything because of market conditions (Ch 6)
producer surplus
difference between the market price and the marginal cost curve
in a perfectly competitive market, free entry and exit cause long-run economic profits to
equal zero
constant returns to scale
exist when ATC does not change as the quantity produced changes
If it is impossible for the company to pay its fines, the company should
file for bankruptcy (Ch 6)
exit
long run decision to leave the market
economies of scale
occur when ATC falls as the quantity produced increases
diseconomies of scale
occurs when ATC rises as quantity produced increases
